The UK’s experience of Brexit should serve as a warning to global political leaders about the costs of putting up trade barriers, the Bank of England’s governor said.
With fears growing that the escalating trade war between the US and its major trading partners could derail an otherwise healthy global economy, Mark Carney pointed to the UK’s recent underperformance as a lesson in the perils of deglobalisation.
“The experience of Brexit underscores that the impact of global trade war will be greater the more business confidence is affected, the more financial conditions tighten and, most fundamentally, the more permanent the loss of openness is expected to be,” he said.
The BoE calculates that the tariffs already announced by the US, EU, China, Canada and Mexico would, if implemented, double average bilateral tariffs and raise average US tariffs to their highest level for more than 50 years.
The direct effect of these measures would be small, and largely confined to the countries directly involved, said Mr Carney, who also chairs the international Financial Stability Board.
But the BoE’s models suggest that a larger increase in tariffs of 10 percentage points between the US and all its trading partners could take 2.5 per cent off US output and 1 per cent off global output through trade channels alone.
The hit to global growth would be much larger if everyone put up tariffs against everyone else, Mr Carney told a business audience in Newcastle. And this would still reflect only the direct impact of higher tariffs. If global business confidence fell, financial conditions tightened and the tariffs were viewed as permanent, the losses in global output could plausibly be doubled, Mr Carney said.
The UK’s experience since the 2016 referendum illustrated these effects, he said. Even though Brexit had not yet happened, uncertainty over future trade relations had had a sapping effect on UK business investment and the squeeze on real incomes caused by sterling’s depreciation had hit consumer confidence.
As a result, the UK economy had grown up to two percentage points less than the BoE would otherwise have expected, given the strong global backdrop and more supportive monetary and fiscal policy, said Mr Carney.
Over the longer term, these losses would be compounded because a loss of trade openness would be likely to drag on productivity growth, he said. [...]
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Speech by Mark Carney at the Northern Powerhouse Business Summit
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